SBA Rule Update Affirms Separate ESOP Valuation Not Required

The Small Business Administration (SBA) formally updated its rules for valuation in ESOP transactions, incorporating prior guidance that it no longer requires a separate SBA valuation.

After the passage of the Main Street Employee Ownership Act in 2018, the SBA kept in place its requirements that loans for an ESOP require an SBA valuation, even though ERISA already requires an independent and more thorough valuation. The SBA issued procedural guidance in 2024 that it would no longer require a separate valuation for the SBA. Now the SBA has reissued that ruling in Procedural Notice 5000-872764, Revisions to SOP 50 10 8 – 504 and 7a. It is not clear why this was necessary, given that the language is identical to the 2024 notice.

The notice states, “Regardless of the requirements stated throughout this SOP for business valuations, an independent business valuation is not required when the Lender is making a loan involving ESOPs for the types of loans discussed in this Paragraph B. In lieu of an independent business valuation, the Lender may use the valuation obtained by the ESOP that was made in accordance with ERISA specifications.”

The heading above this language reads, "Business Valuation Requirements for Loans to Employee Stock Option Plan (ESOPs)" (emphasis added), but it is clear that it has nothing to do with stock options and was meant to read, "Business Valuation Requirements for Loans to Employee Stock Ownership Plans (ESOPs)."